Pfizer Said to Be Closing In on Deal for Wyeth

The purchase of Wyeth by Pfizer for more than $60 billion could be completed over the weekend.

ANDREW ROSS SORKIN

This article was reported by Duff Wilson, Natasha Singer and Andrew Ross Sorkin and written by Mr. Sorkin.

Is the long-awaited drug industry consolidation under way?

That was the question Friday as word spread that Pfizer was near a deal to buy Wyeth for more than $60 billion in cash and stock. With teams of bankers and lawyers racing to complete that deal over the weekend, the blockbuster transaction could be announced within days, according to people involved in the talks.

A combination of Pfizer and Wyeth, which has been long envisioned throughout the industry, would make Pfizer, already the world’s biggest drug company, even larger. Pfizer had revenue of more than $48 billion in 2007, and Wyeth’s sales exceeded $22 billion. Their combination would put pressure on rival companies to seek their own mergers.

“The dance needs to get started,” said Catherine J. Arnold, an analyst for Credit Suisse. “I think this action would do that,” she said. “There’s overcapacity in the pharmaceutical sector at large.”

Under the terms of the deal being negotiated, Pfizer would pay about $50 a share for Wyeth, these people said. Pfizer would pay about two-thirds of the price tag in cash and one-third in stock. Pfizer would finance the deal, in part, through its own cash reserves — some of which are abroad and need to be repatriated, probably incurring tax penalties — and the rest through loans from banks.

People involved in the deal cautioned that the talks could still collapse, in part because there are so many moving parts: the buyer, the seller and at least five banks that all need to agree on financing conditions in a very difficult credit market. The boards of both companies have scheduled special meetings for Sunday to vote on the deal in anticipation of continued negotiations through the weekend.

Other companies that have long been seen as take-over candidates include the conventional drug giants Bristol-Myers and Schering-Plough and the biotechnology players Amgen and Biogen Idec.

The negotiations between Pfizer and Wyeth appear to be driven by cost savings as much as by sales and research opportunities. Pfizer is heading toward a big patent cliff with the expiration of its rights to Lipitor, the best-selling drug in the world, in November 2011. Sales of the drug, $12.7 billion in 2007, account for a quarter of the company’s total revenue. And by 2015, patent expirations will mean Pfizer will have lost 70 percent of the revenue it would have had in 2007.

As patents expire, generic drug makers can swoop in with low-priced versions. Indeed, the growing market share of generic drugs is one of the big problems for many makers of brand-name pharmaceuticals.

Wyeth has a big vaccine and biologics business that is not facing the same level of patent pressures, because it is much more complicated and cost-prohibitive to make generic versions of such drugs. So a merger would add diversity and bring stability to Pfizer’s drug sales.

Still, because much of Pfizer and Wyeth’s portfolios overlap, there is potential to save billions of dollars through cutting duplicative costs, analysts say.

“If Pfizer and Wyeth combine sales forces and other operations, they will have a sleeker cost structure,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “Most other large companies have cut just everything they can. The only way to come up with new cuts without endangering their future is to merge in a way that creates redundancies that give the companies new job-cutting opportunities.”

Two weeks ago Pfizer said it would lay off 800 researchers, and it hinted at further job cuts. Last year, it did away with more than 10,000 jobs and announced it would focus on six therapeutic areas — cancer, pain, inflammation, diabetes, Alzheimer’s disease and schizophrenia.

It remains an open question whether mergers in the pharmaceutical industry work at all. Pfizer is itself a product of a series of mergers, with mixed results. It bought Warner-Lambert, which owned Lipitor, for more than $90 billion in stock in 2000 and three years later bought Pharmacia for stock valued at $60 billion.

"Pfizer’s tried it before, and it really hasn’t worked with other firms," said Edward F. X. Hughes, a professor who teaches pharmaceutical business at the Kellogg School of Management at Northwestern University.

The deal may also demonstrate that pharmaceutical companies feel the need to be more diversified beyond prescription drugs. A Pfizer-Wyeth tie-up would be one way for Pfizer to get back into the consumer health business. Wyeth owns brands like Advil and Centrum vitamins. In 2006, Pfizer sold its consumer business — which included such household names as Sudafed, Listerine, Nicorette and Lubriderm — to Johnson & Johnson, which because of that acquisition has managed to weather the financial storm better than its rivals.

For Pfizer, which is led by Jeffrey B. Kindler, 52, a lawyer who previously worked for McDonald’s, the transaction would also bolster the company’s presence in biologic drugs, which are made from living cells, instead of the chemicals on which conventional pharmaceuticals are based. Wyeth’s Prevnar, a childhood vaccine against pneumonia and meningitis, is made from living cells and is generally considered more immune to competition from generics. Wyeth also makes Enbrel, one of the world’s biggest biologics with about $3 billion in global sales for the first nine months of 2008. Enbrel is a drug that treats adult rheumatoid arthritis and plaque psoriasis.

“To be able to take over Wyeth’s well-regarded biotech stuff is pretty good,” Mr. Gordon said.

Investors applauded the possibility of a deal. Shares of Wyeth closed up 12.6 percent to $43.74 after The Wall Street Journal reported news of the talks on Friday. Pfizer rose 1.4 percent to close at $17.45, a rare show of confidence by investors for a potential buyer during a merger.

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